I'm thinking, Mark has never co-written anything with anyone, Mark has said he prefers to write alone. Why would he suddenly change his pattern with this guy? I'm not saying the guy is lying, but the whole thing sounds very strange.
My take is this is more or less a "let's have some fun with guitars and songs" proposal rather than let's write, record and publish songs together. Like he did with Bob Dylan, Chet Atkins and all the rest of them... Besides, good artists copy, and great artists steal, so it's a good idea to invite somebody you like to "beg, steal and borrow" from them as Chet Atkins would say. A very good tactical manoeuvre from MK in my book.
With that said, for hilarious Mark Knopfler stories, you go to Ed Bicknell. This is rather an embarrassing story.